Harrison: Sentiment Is All That Matters

Your Real Vision Daily Briefing for June 6, 2020

Max Wiethe & Ed Harrison discuss sentiment, the 2020 election, and forward earnings & what its impact will be on markets in the coming months.

  • Sentiment is driving equities upward, but the psychology of the Fed propping up markets while the real economy stagnates could prompt a different kind of sentiment change come November.
  • Investor bullishness is a byproduct of Fed liquidity and is likely to persist even amid listless forward earnings.
  • Equity prices may come down in September or October when we see what actual earnings will be.

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Bullish sentiment driven by Fed liquidity is buoying markets right now, but politically driven sentiment around inequality may precipitate a Democratic sweep and changes to fiscal policy in November, Ed Harrison said during today’s Real Vision Daily Briefing.

Harrison said that the average American understands that financial assets are producing wealth for a tiny percentage of people as the real economy is suffering, which partly explains the current influx of retail investors. Ordinary people want a piece of what the rich are getting and don’t feel like they’re sharing in the American dream, he said, and that sentiment around the widening inequality could have a major impact on the outcome of the 2020 election and as a result, fiscal policy in 2021 and beyond.

In markets and in politics, it seems that sentiment is the thing that matters most. The certainty investors are feeling comes from looking at the total assets of the Federal Reserve; the chart shows such a massive vertical leap that people don’t care if earnings are going down because they feel that the Fed has their back and they don’t think poor earnings will last.

The Fed is giving people the certainty they need to continue to get into the equity market – it’s a huge psychological impact that causes a risk-on behavior, Harrison said.

Whether the Fed can keep markets elevated forever remains to be seen, however, and Harrison thinks that reality will be revealed in the next one to three months once we see what happens to enhanced unemployment benefits, state shut-downs, consumer spending, and EPS estimates.

He noted that a record number of that have withdrawn their EPS estimates in recent months due to uncertainty surrounding the impacts of the virus, but by September or October the data will be in and prices may have to come down when we see what earnings will be.